Matthew Tillett, the new lead fund manager of Brunner, is happy to hold Microsoft as his biggest position in the global investment trust but is wary of investors' confidence in highly-rated technology companies.
Matthew Tillett has poured cold water on the narrative around disruptive tech companies that has dominated markets during his first few months as lead manager of the Brunner (BUT ) investment trust.
Tillett, previously deputy at the £338m global trust, got the top job in May when Lucy Macdonald left after a reorganisation at Allianz Global Investors. The manager, joined on the fund by Jeremy Kent and Mark Morris-Eyton, emphasised that her departure had not led to a major overhaul.
‘It’s very much business as usual, as far as the investment philosophy, process and portfolio is concerned. We have made some changes to the portfolio, but apart from one or two examples, those changes have not been made because I’ve become lead manager,’ he said.
Tillett said the approach had become ‘slightly more collegiate’, with the income focus in his background complemented by Kent’s work on sustainable funds and Morris-Eyton as a growth investor.
However, the team has had to grapple with the shifting environment amid the coronavirus pandemic. The perceived acceleration of all things digital has been a boon for US tech companies, which Brunner has largely avoided other than its top holding Microsoft (MSFT.O).
Shareholder total returns of 5% in the last 12 months are underwhelming in the context of the 41% average gain in its Association of Investment Companies (AIC)’s Global sector, although that is heavily skewed by the behemoth Scottish Mortgage (SMT ) doubling over that time.
Brunner, which yields 2.4% and is a leading AIC ‘dividend hero’ with 48 years of consecutively rising payouts, has a tilt towards income and more cyclical stocks, which are out-of-favour.
It also maintains a bias to the struggling UK market with its benchmark being 30% FTSE All-Share and 30% FTSE World ex-UK index, although only 17% of the portfolio was in UK shares at the end of last month.
Those leanings saw the shares slide to a 20% discount below net asset value in early October, about double the gap when Tillett took over, although it has since narrowed again to around 13% as UK and international markets have rallied.
A self-fulfilling narrative
The manager, who also heads up the Allianz UK Opportunities fund, said his team was avoiding taking ‘extreme views’ as he questioned the received wisdom about the pandemic’s long-term effects.
In an interview before the US election, Tillett said: ‘This stock market is being driven to a significant extent, I believe, by certain narratives that have taken hold in the market. For example, the disruption narrative around technology and this idea that all industries are being disrupted by digital technology and there are winners and losers,’ he said.
‘That’s something we’ve been aware of for some time, but it’s really become a very consensual viewpoint right now. Then you have the pandemic, which is seen as accelerating many of these trends. Many people now seem to think it’s permanent, what we’re seeing at the moment.
‘The third narrative is this idea that low interest rates are here forever and that therefore justifies high valuations for very high growth, high quality companies.’
Tillett said such narratives can become ‘embedded’ in investor psychology, leading market dynamics to become self-fulfilling.
It’s starting to feel a little bit like that to me,’ he said.
‘In those kinds of situations, you just maybe need to step back a little bit and make sure you’re not getting carried away. Because there’s much that’s true about those narratives, let’s be clear.
‘But it’s not universal. Many things will come back. Many sectors that are depressed at the moment will recover again.’
Not scared of cyclicals
Accordingly, the Brunner team has focused on balance sheets and quality companies, so the portfolio should perform strongly across different scenarios as we return closer to something like normality.
Tillett gave the post-crash purchase of Redrow (RDW) as an example. The UK housebuilder’s shares have crashed 40% this year. But the manager argued the sector was facing a short-term cyclical issue, while Redrow would benefit from likely consolidation and had strong growth prospects due to an attractive landbank.
Meanwhile, the trust has also finished selling out of events and publishing group Informa (INF), arguing its trade shows business would in fact see a permanent decline.
CME Group (CME.O) is a more recent buy, with the managers taking advantage of short term weakness. The exchange, the global leader for derivatives like S&P 500 futures, has taken a hit due to the 30% of its business in US treasuries. With the Federal Reserve buying huge volumes of US government debt there has been a suppression of volatility which drives trading, and the group’s profits.
Tillett argued the market had overreacted given the quality nature of CME’s business, which is effectively a monopoly in some areas. He also characterised the company as ‘big beneficiaries of digitisation’, able to use an increasing wealth of data to offer a ‘captive customer base’ post-trade services and data analytics products.
Going digital beyond California
Tillett highlighted other holdings benefitting in similar ways, beyond the narrow confines of Silicon Valley.
The manager pointed to their stake in IT consulting firm Accenture (ACN.N), a 3% position, whose growth has been driven by the digitisation of its customers.
US broker Charles Schwab (SCHW.N) is an example in consumer financials, said Tillett. The business enjoys a ‘massive scale advantage over peers’, he said, which digitisation helps them to leverage, while offering more services to customers.
He also highlighted SThree (STEM), which specialises in high end recruitment in areas like computer science, where demand is booming. The shares are trading on an attractive valuation, as Tillett said the market was overlooking that trend.
Swiss luxury goods group Richemont (CFR.S) is one name the new team have sold due to a change in preferences, buying LVMH (LVMH.PA) instead. Tillett said that reflected higher conviction in the more diversified French group.
The board has said it intends to pay a total dividend of 20.01p for the trust’s current financial year, ending 30 November, up from 19.98p last year. That is backed up by strong revenue reserves, which trusts can use to support payouts to investors when their own holdings cut dividends. These currently cover the well the dividend for well over a year.
In the three years till the end of September, shareholders enjoyed total returns of 11%, versus the 18% rise in the trust’s benchmark, according to the last factsheet. The MSCI AC World index rose 28% over the same period.